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Packing Less Punch: Millennials’ Home Purchasing Power Drops by $40K due to New Stress Test Rules

Millennials looking to purchase new property across Canada this year are going to have to settle for less. The average peak millennial’s purchasing power in Canada is 16.5 per cent lower than it was at this time last year, meaning they qualify for a mortgage of about $40,000 less than before.

The finding comes from Royal LePage, which put out a study last week looking at how purchase power for millennials took a hit after the recently introduced OSFI stress test regulations. For the purpose of this study, Royal LePage focused on “peak millennials” – a term used to describe the largest cohort of millennials, born between 1987 and 1993, and their potential purchasing power.

“For peak millennials, the group which makes up the bulk of our first-time homebuyers, the path to property ownership has been a challenging one. In our largest cities, it is difficult for young people to purchase a home on a single household income,” said Phil Soper, president and CEO of Royal LePage.

The current median salary for a millennial is $38,148, and while the maximum purchase price on a home averaged $243,349 last year for a millennial, that’s now dropped to $203,246.

And when taking a dual income into account, the maximum purchase price a millennial couple can spend on a starter home is now $406,479 in Canada – compared to $486,674 before the new stress test rules.

OSFI stress test now applies to all first-time homebuyers

The new stress test regulations came into effect at the beginning of the year. This test isn’t new, but before January 1, it only applied to people with a down payment of less than 20 per cent. Now it applies to everyone buying a home, regardless of down payment size.

This means a borrower must be able to afford the greater of two options: either the five-year benchmark rate set by the Bank of Canada (currently 5.14 per cent) or your contractual mortgage rate (whatever rate your bank offers you) plus two percentage points. The hope is that this will prevent people from buying houses they can’t afford. This adjustment rides on the cusp of many other changes made to “regulate” the housing market, including rate hikes, as well as the Ontario Fair Housing Plan.

Major cross-Canada differences in purchase power

The Royal LePage study also looked at the difference in peak millennial purchase power across eight major cities in Canada. Depending on where you live in Canada, there are huge differences in the type of house you can afford.

The study found the average starter home across Canada costs between $325,000 and $425,000, has 2.7 bedrooms, 1.8 bathrooms and 1,269 sq. ft.

But people in Vancouver are getting much less for that money. Vancouverites get the least amount of house for their dollar in Canada, with the average home at that same cost having 1.5 bedrooms, 1.2 bathrooms, and 788 sq. ft. This is the country’s most expensive housing market, as we see many millennials in that area moving into the suburbs to be able to purchase a home and/or needing assistance from their family to do so.

And the Greater Toronto Area comes in close second, where there is increasing competition for those entry-level homes as well.

“While $425,000 will largely net an entry-level condo in Greater Vancouver and the Greater Toronto Area, on the East Coast, this budget unlocks the majority of the market, offering prospective millennial purchasers large, detached homes with all of the bells and whistles,” said Soper from Royal LePage.

Millennial homebuyers in Halifax get the best bang for their buck, with the average home at that cost having 3.1 bedrooms, three bathrooms and 1,736 sq. ft.

Royal Lepage also found that a peak millennial can purchase an entire home in Moncton, New Brunswick for the same cost as the average 20 per cent down payment on a home in the Greater Toronto Area or Greater Vancouver.

What are your options?

There are other resources to help millennials afford the home they want.

Buying a home for the first, second or even third time can be a daunting task. But for first-time home buyers, the biggest issue is often coming up with a down payment for these properties. Some are buying homes with family or friends, borrowing money from their parents, or saving for years to afford a starter house. It’s also key to find the best possible mortgage for your needs. Thankfully, RateSupermarket.ca can help; check out our mortgage affordability calculator to see how much of a mortgage you can sustain, and let us help you find the best possible rate for the home you want.